Environmental Regulations as Industrial Policy: Evidence from the Global Automotive Industry

Professor Nam, Kyung-min   (Principal Investigator (PI))

36

2017-03-01

2020-02-29

33240

Environmental Regulations as Industrial Policy: Evidence from the Global Automotive Industry

automotive industry, environmental regulations, industrial policy, vehicle emission standards

Urban Studies and PlanningInternational Business

201611159128

Seed Fund for PI Research – Basic Research

2016

Completed

Can environmental regulations also enhance local industrial performance, overachieving their primary goal of protecting the environment? Environmental protection and industry promotion are often viewed as conflicting goals, due to the policy compliance costs and associated efficiency loss under environmental regulations (Ederington and Minier, 2003; Gray and Shadbegian, 1998). However, such short-term costs may be substantially offset by long-term efficiency gains, thanks to efficient use of resources, increased supply of energy-efficient infrastructure, or innovations promoted under the regulations (OECD, 2011; Porter and van der Linde, 1995; World Bank, 2012). Although this so-called Porter hypothesis sounds plausible in reality, given the increasing convergence of ""green"" and ""advanced"" technologies, it still lacks empirical evidence. This study is motivated to further articulate the Porter hypothesis and provide its empirical bases. In this proposed study, I focus on learning and technological catch-up encouraged under appropriate environmental regulations, which is a potential channel of ""green growth"" but has been largely neglected in the literature. In exploring the environment-learning link, I am particularly interested in the global automotive industry, as its performance is sensitive to environmental regulations, and it adopts foreign direct investment (FDI) as a key technology-diffusion agent (Gallagher, 2014; Nam and Li, 2013). That is, in the context of prevalent down-market FDI engaged in production of sub-standard vehicle models, appropriate environmental standards may incentivize multinationals to introduce advanced/cleaner technologies to host economies, thereby contributing to local industry upgrade (Nam, 2011; Saikawa and Urpelainen, 2014). Despite its plausibility, this possibility has rarely been explored in empirical settings; this proposed study aims to fill the gap. In detail, my conceptual lens consists of two main hypotheses. The first is that the strong presence of FDI in the local automotive sector tends to increase the chance of implementing vehicle emissions standards, even when local air quality and development stage are controlled for. The second hypothesis is that vehicle emissions standards may encourage multinationals to introduce advanced technologies to local markets and thus promote technological catch-up—particularly in developing countries, where FDI is often employed as a main mode of access to advanced knowledge and knowhow. For empirical analysis, I first construct a 47-country panel data set, covering 2000-2014, from various firm and industry-level datasets, including Ward’s Automotive Yearbooks, the International Organization of Motor Vehicle Manufacturers database, and the United Nations Comtrade database. The hypothesis testing will be based on a fixed effects logit model and an extended Granger causality test. The main academic merits of the proposed study are threefold. First, the study enriches the empirical literature in support of the Porter hypothesis or the green growth concept. These two concepts, despite their plausibility, have been questioned due to lack of empirical evidence. In this study I intend to further articulate and extend the concepts and strengthen their empirical bases. Second, this study can contribute to the literature from a methodological perspective. The proposed method based on the fixed effects logit model and the Granger causality test can control for various non-treatment effects and potential endogeneity, and thus yield solid empirical results. Finally, this study is coupled with ongoing policy debates on the environment-development nexus, appealing to a broad audience. A potential policy implication of this study is that increased environmental standards are likely less costly than conventionally assumed, if the neglected industry-promotion dimension is taken into account, which urges the need for earlier policy actions for a cleaner environment. References [1] Ederington, J., and J. Minier. 2003. ""Is Environmental Policy a Secondary Trade Barrier?: An Empirical Analysis."" Canadian Journal of Economics 36: 137-154. [2] Gallagher, K.S. 2014. The Globalization of Clean Energy Technology: Lessons from China. Cambridge, MA: MIT Press. [3] Gray, W.B., and R.J. Shadbegian. 1998. ""Environmental Regulation, Investment Timing, and Technology Choice."" Journal of Industrial Economics 46(2): 235-256. [4] Nam, K.-M. 2011. ""Learning through the International Joint Venture: Lessons from the Experience of China's Automotive Sector."" Industrial and Corporate Change 20(3): 855-907. [5] Nam, K., and X. Li. 2013. ""Out of Passivity: Potential Role of OFDI in IFDI- based Learning Trajectory."" Industrial and Corporate Change 22(3): 711-743. [6] Organisation for Economic Co-operation and Development (OECD). 2011. Towards Green Growth. Paris: OECD. [7] Porter, M.E., and C. van der Linde. 1995. ""Toward a New Conception of the Environment-Competitiveness Relationship."" Journal of Economic Perspectives 9(4): 97-118. [8] Saikawa, E., and J. Urpelainen. 2014. ""Environmental Standards as a Strategy of International Technology Transfer."" Environmental Science and Policy 38: 192-206. [9] World Bank. 2012. Inclusive Green Growth: The Pathway to Sustainable Development, Inclusive Green Growth. Washington, DC: World Bank.